To paraphrase Gordon Gekko, sin is good. Or in this case, at least a little better than investing your conscience.
At a time when the volatility on Wall Street has many investors re-examining their investments and trying to understand strategies that involve quantitative analysis, strategic investment vehicles or mortgage-backed securities, several small mutual funds have relied on the Wall Street equivalent of the good and evil approach.
The Vice Fund, based in Dallas, has invested substantially in "sin stocks" -- companies that may promote drinking and gambling as well as military contractors and tobacco companies.
"We're not advocating these behaviors at all. We're just looking at this through the eyes of an investor," said the fund's portfolio manager, Charles Norton, who himself does not smoke, drinks "on occasion" and gambles a couple of times a year. The fund's goal is simple, he said: "to just make money."
On the flip side are some of the mutual funds that strive to be socially and morally responsible.
Funds like Domini Social Equity and Citizens Core Growth cherry-pick companies that meet their social and environmental objectives.
"It's the mindset of our investors," said Jeff MacDonagh, portfolio manager at Domini Social Equity fund. He says the fund favors companies that promote "human dignity" and "environmental sustainability."
The two funds also try to use their shareholder investments and proxies as a way to force change on issues like sweatshop labor and the environment.
MacDonagh said that his fund avoids companies that could be seen as preying on addictions to things like alcohol, gambling and tobacco and that it shies away from companies with poor records on human rights and global warming.
George Schwartz, the portfolio manager of the US$282 million Ave Maria Catholic Values fund, said that some investors like to know they are not supporting pornography, abortion or birth control.
But in the end, at least on Wall Street, money talks. And so far this year, vice has trumped conscience.
The US$124 million Vice Fund, which has been trading for five years, is up 14.1 percent this year, compared with 5.1 percent for Standard and Poor's 500-stock index, according to Morningstar, which tracks mutual funds. The fund has outperformed the Standard & Poor's in each of its five years.
Thomas Galvin, portfolio manager of the Excelsior large-cap growth fund, said "sin" stocks tend to be insulated from swings in the economy.
The Ave Maria Values fund has also outperformed the Standard & Poor's since its inception in 2001, Schwartz said. But it has not done so this year; so far this year, the fund is up 1.9 percent.
"When we first started this fund, we were hoping we would at least match the market, and we didn't know how much penalty there would be for screening out certain companies," he said.
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